McKesson HBOC Restates Revenue McKesson Corporation, the nation’s largest drug wholesaler, acquired.

McKesson HBOC Restates Revenue

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McKesson Corporation, the nation’s largest drug wholesaler,
acquired medical software provider HBO & Co. in a $14.1 billion stock deal
in early 1999. The transaction was touted as having created the country’s
largest comprehensive healthcare services company. McKesson had annual sales of
$18.1 billion in fiscal year 1998, and HBO & Co. had fiscal 1998 revenue of
$1.2 billion. HBO & Co. makes information systems that include clinical,
financial, billing, physician practice, and medical records software. Charles
W. McCall, the chair, president, and chief executive of HBO & Co., was
named the new chair of McKesson HBOC. As one of the decade’s hottest stocks, it
had soared 38-fold since early 1992. McKesson’s first attempt to acquire HBO in
mid-1998 collapsed following a news leak. However, McKesson’s persistence
culminated in a completed transaction in January 1999. In its haste, McKesson
closed the deal even before an in-depth audit of HBO’s books had been
completed. In fact, the audit did not begin until after the close of the 1999
fiscal year. McKesson was so confident that its auditing firm, Deloitte &
Touche, would not find anything that it released unaudited results that
included the impact of HBO shortly after the close of the 1999 fiscal year on
March 31, 1999. Within days, indications that contracts had been backdated began
to surface.

By May, McKesson hired forensic accountants skilled at
reconstructing computer records. By early June, the accountants were able to
reconstruct deleted computer files, which revealed a list of improperly
recorded contracts. This evidence underscored HBO’s efforts to deliberately
accelerate revenues by backdating contracts that were not final. Moreover, HBO
shipped software to customers that they had not ordered, while knowing that it
would be returned. In doing so, they were able to boost reported earnings, the
company’s share price, and ultimately the purchase price paid by McKesson. In
mid-July, McKesson announced that it would have to reduce revenue by $327
million and net income by $191.5 million for the past 3 fiscal years to correct
for accounting irregularities. The company’s stock had fallen by 48% since late
April when it first announced that it would have to restate earnings.
McKesson’s senior management had to contend with rebuilding McKesson’s
reputation, resolving more than 50 lawsuits, and attempting to recover $9.5
billion in market value lost since the need to restate earnings was first
announced. When asked how such a thing could happen, McKesson spokespeople said
they were intentionally kept from the due diligence process before the
transaction closed. Despite not having adequate access to HBO’s records,
McKesson decided to close the transaction anyway.

Case Study Discussion Questions

 1. Why do you think McKesson may have been in such a hurry
to acquire HBO without completing an appropriate due diligence?

 2. McKesson, a drug wholesaler, acquired HBO, a software
firm. How do you think the fact that the two firms were in different businesses
may have contributed to what happened?

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